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Wednesday, 11 March, 2015

Free Trade Zones: Lowering Old Barriers – Reaching New Heights

Following the constant development of the Shanghai Free-Trade Zone (FTZ), the barriers for investing in companies have once again been lowered, as reforms aiming to encourage further foreign investment continue. In June 2014, the Statistics Bureau of Shanghai estimated 10,000 registered entities in the zone, with 661 of those recorded as foreign-invested enterprises.

Recent Updates Made to the ‘Negative’ List

With an ambition to continuously limit the paperwork and reduce the restrictions related to setting up an entity in the Shanghai FTZ, the Shanghai Municipal Government has recently shortened its ‘Negative’ list. The June 2014 edition contained 135 items, 27% shorter than the preceding edition, as it removed more than ten restrictions that partook in the 2013 'Negative' list. Moreover, Shang Yuying, Chairman of the Shanghai Commission of Commerce, has recently shared the zone’s objective to shorten the list to less than 100 items in 2015.

Removing Entry Restrictions for E-Commerce Companies

On 13 January 2015, China’s Ministry of Industry and Information Technology (MIIT) announced an alteration to the Shanghai FTZ. The announcement detailed that the MIIT has introduced a pilot scheme allowing wholly foreign owned e-commerce enterprises within several sectors in the Shanghai FTZ. Prior to this reform, foreign investors were only allowed to control 55% of the shares in online data and transaction processing businesses in the Shanghai FTZ, as compared to the 50% control permitted to foreigners in Mainland China. The modification of the regulations for online data processing and transaction processing services will now allow foreigners investing in e-commerce companies to conduct business without limitations in the FTZ. Foreign investors are furthermore fully allowed to provide call centre, domestic multi-party communication and internet access services. However, virtual private network (VPN), internet data centre, storage and forwarding and information services still require a joint venture with a Chinese partner within the zone.

Policy

Outside Shanghai FTZ

Inside the Shanghai FTZ

Ownership

JV is required with foreign investment <50%.

Both JV s and WFOE s can be established, as foreign investments can account for up to 100%.

Registered capital

For businesses operating within the scope of a province, autonomous region or municipality, the registered capital minimum requirement is RMB 1,000,000. For businesses operating in the whole country or across provinces, autonomous regions and municipalities, the minimum registered capital is RMB 10,000,000.

Minimum registered capital requirements correspond to RMB 1,000,000

* A brief overview of the regulations applying when setting up an E-Commerce WFOE in the Shanghai Pilot Free Trade Zone

Free-Trade Zones as China’s Future Economic Frontrunners

In December 2014, the Standing Committee of the National People’s Congress of China announced the exact locations of the three new FTZs as well as the expansion of the Shanghai FTZ from 28.78 to 120.72 square kilometres, which will position the zone as China’s largest. Apart from the existing areas of Waigaoqiao, Pudong Airport, Yangshan land and harbour, the extended FTZ will also include Jinqiao development zone, Lujiazui financial district, and Zhangjiang hi-tech park.

In addition to the expansion of the Shanghai FTZ, the locations of the three new FTZs, in respectively Tianjin municipality, Fujian province and Guangdong province, were also announced on 12 December 2014.

The Binhai New Area industrial park, Tianjin Airport and Tianjin Port will constitute the Tianjin FTZ covering a total area of 119.9 square kilometres.

Fujian FTZ, with a total area of 118.04 square kilometres, will consist of the industrial areas of the provincial capital of Fuzhou, as well as Xiamen and Pingtan.

Lastly the Guangdong FTZ, expected to be launched in the first half of 2015, will cover 116.2 square kilometres and consist of the Nansha New Area in Guangzhou, the Qianhai and Shakou areas in Shenzhen and the Zhuhai Hengqin New Area.

Mainly due to its geographical location, the Guangdong FTZ is projected to function as a gateway to not only Hong Kong and Macao, but also Africa, Latin America and Europe.

Based on our observations of the Shanghai FTZ’s development, we expect that the Guangdong FTZ will adopt several of Shanghai’s practices, as the Guangdong FTZ aims to establish itself as China’s southern gateway to overseas trade. In the following we will briefly elaborate on how Guangdong intends to utilise the experiences gained from Shanghai to achieve this objective.

The Guangdong Free-Trade Zone – Inspired by Shanghai

As a new Free-Trade Zone, the Guangdong FTZ is expected to apply Shanghai’s ‘Negative’ list system, while also following the structure of the trade supervision, financial innovation and the comprehensive supervision systems of the Shanghai FTZ . The Guangdong FTZ is further structured to ensure the focus of each of its zones to its core competences, as every zone underlines different areas of development: Qianhai partakes in high-tech and service industries, Hengqin cooperates tourism, commercial services, high-tech along with cultural and creative industries, and Nansha attends to port and manufacturing industries, while it is also the plan that it will have connecting routes to Hong Kong and Macao.

China’s Southern Gateway

The main ambition of the Guangdong FTZ is to provide the optimal foundation for expanding cooperation with Hong Kong and Macao. In 2003, Mainland China signed the Closer Economic Partnership Arrangement (CEPA) with Hong Kong and Macao, granting them a preferential access to the market in Mainland China. The Guangdong FTZ now further strengthens the economic ties between Mainland China and Hong Kong and Macao, while also striving to remove policy barriers.

It is projected that the Guangdong FTZ will open up further to Hong Kong and Macao, allowing investors the same treatment as PRC citizens in several areas. According to the draft, the Free-Trade Zone will lower, or even cancel, access restrictions on Hong Kong and Macao investors. This will include terms of qualification, distribution of shares, scope of business within the professional, trading, financial and scientific service industries. It is furthermore expected that the shipping industry and the maritime services in Guangdong and Hong Kong will be strengthened from the FTZ, as the zone will further encourage overseas investment in the shipping management field, primarily through lowered trade barriers.

Additionally, enterprises established and operating in the Guangdong FTZ are said to be permitted to borrow RMB directly from Hong Kong banks. It is thus expected that banks and other financial service companies in Hong Kong will utilise this opportunity to enter direct competition with banks and other companies from Mainland China.

In addition to creating stronger bonds with Hong Kong and Macao, the Guangdong FTZ, through the zone in Hengqin, also intends to create free trade platforms with the Portuguese speaking countries of Angola, Brazil and Portugal. In this regard, a Chinese and Portuguese product exhibition, along with a trade centre and a cross boarder e-commerce platform is being planned. Thus gateways to Europe, Africa and Latin America will be established in Portugal, Angola and Brazil allowing China easier access to sources such as Latin America’s abundant agricultural products and minerals.

The complete detailed scope of the Guangdong FTZ has yet to be fully revealed. We will therefore continue to keep a look out for any last minute adjustments made. According to our research and experience, however, the abovementioned observations are very likely to be included in the final version of the Guangdong FTZ.